What Are Dividend Aristocrats And Dividend Kings?
Seeking Alpha Analyst Since 2017
Summary
- Dividend Aristocrats and Kings are loved by many investors, but what are they?
- Consistent dividend raises over time can deliver market-beating returns.
- Management teams are forced to plan carefully and profitably.
The world of investing can be a pretty confusing place. You don't have to look hard to be bombarded with all sorts of confusing jargon and terminology. It is really easy to be put off and think that investing is far too complicated for ordinary people like us who are not financial professionals.
I am passionate about the power of dividend investing as a ladder to climb towards financial freedom. The whole reason I started this website was to help educate people just like you and me. I want to help people that want to get started with investing, but don't have the detailed knowledge or hours available for studying.
Today I want to uncover two of key terms that you are sure to come across as you learn about dividend growth investing. Those terms are Dividend Aristocrats and Dividend Kings.
If you want to be successful in dividend growth investing it is vital that you know what these two terms are. I'll explain how they can be incredibly useful when you are building a dividend growth portfolio. They are some of the best stocks you can buy and I want to explain why.
What are Dividend Aristocrats and Dividend Kings?
Apart from sounding like they were taken from mediaeval Europe, what are Dividend Aristocrats and Dividend Kings? Thankfully, the definition of both of these terms is very straightforward.
Dividend Aristocrats are companies which have raised their dividend every year for at least the last 25 years.
Dividend Kings are a more exclusive group. They have raised their dividend every year for at least the last 50 years.
They also need to be listed on the S&P 500 and have a market capitalisation of at least $3 billion.
Those are some pretty impressive companies!
There are currently 65 Dividend Aristocrats and 30 of those are also Dividend Kings. This includes many gigantic household names. Coca-Cola, Johnson & Johnson, Walmart and McDonald's are all on there. There are also a lot of companies that you have probably never heard of but are still extremely successful corporations with decades of operating history.
OK...so what?
Being a Dividend Aristocrat or King shows a dedication to consistent and growing shareholder returns. As dividend growth investors, that's exactly what we want to see!
To be able to raise their dividend every year for decades shows resilience and ability to grow even in poor economic conditions. They are all large and well-established companies with a clear competitive advantage. Most of them are also in industries which are seen as defensive or recession-resistant. Even in the crash of 2008 and the resulting recession, none of the companies currently on these lists cut their dividends. In fact, they were able to keep growing them.
With the economic damage from the COVID 19 pandemic, hundreds of companies have cut or eliminated their dividends.
But not the Dividend Aristocrats or Dividend Kings.
As dividend growth investors, choosing companies which steadily grow their dividend is essential. Even when the rest of the stock market may be panicking, the Dividend Aristocrats and Dividend Kings keep on going.
Are Dividend Aristocrats and Kings safe from dividend cuts?
Of course, there is no such thing as a 100% safe dividend. If there was, you could be sure I would only have that one stock in my dividend portfolio! It's important to diversify and invest in a range of different companies and sectors.
Dividend Aristocrats have occasionally been removed from the list if they have cut their payout. The most recent example is Ross Stores (ROST) which was cut from the list in June 2020 after it suspended its dividend. If you were invested in many of the 65 Dividend Aristocrats and Kings, that would only have been one company in your portfolio, limiting the damage.
To put that in perspective, it was the first Dividend Aristocrat to removed from the list for cutting its dividend since 2017. Before that, you'd have to go back to 2013 to find the next example. That is a very strong and stable history.
Of course, companies do get added to the list as well once they reach that magic 25-year mark. 2020 has been a pretty busy year with seven new companies added. Becoming a Dividend Aristocrat is a badge of honour for many management teams and is a major part of their appeal to investors.
Why should you invest in Dividend Aristocrats and Dividend Kings?
Simply put, they are some of the very best stocks that you can invest in. That is true for both dividend investors and those who are more interested in growth. Dividend Aristocrats and Kings have a reputation of being defensive, low growth stocks. They are (wrongly) see as more suited to older investors who want good levels of income and low volatility. Younger investors are often encouraged to avoid Dividend Aristocrats and Kings and chase companies with higher growth potential.
I want to explain why I think this is untrue and why Dividend Aristocrats and Kings are good investments for anybody.
Reason #1: Record of solid shareholder returns
Dividend Aristocrats and Kings are companies which have had the ability and the will to pay increasing dividends every year for at least 25 years. That shows an incredible commitment to shareholders. It also shows how these companies have built a culture and brand of annual dividend raises which they will be extremely reluctant to give up.
As we have seen, it is rare for Dividend Aristocrats and Kings to be removed from the list. It generally only happens in very difficult economic times – such as the 2008 crash.
Any company that can raise its dividend every year for decades clearly has a strong and proven business model. That company will have survived recessions, market crashes and panics – all while paying out rising dividends to you and me.
It also shows good management. Paying out dividends every year requires careful planning and dedication to growing company cash flow. This can help lead to a more stable and sustainable business model that will stand the test of time. These will often be companies that have solid balance sheets and good credit ratings. You can't stay in business and raise dividends for decades without excellent fundamentals.
By paying out rising dividends, shareholders are regularly rewarded with a tangible benefit. I always reinvest my dividends to increase my future payouts, but you could withdraw them and spend the cash instead if you wish. Eventually, when I have a large enough income stream to be financially free, that's exactly what I plan to do.
With non-dividend paying stocks, you only make money when you actually take the decision to sell your shares. With Dividend Aristocrats and the Kings, I never have to sell shares if I don't want to as I still receive the benefits on a regular basis. As a result, I don't need to worry about day-to-day market prices as these are not very relevant to me.
That may sound all well and good, but let's have a look at some actual numbers to see how the performance of Dividend Aristocrat and Kings actually stacks up.
Reason #2: Market-beating performanceFar too many people subscribe to the notion that to generate market-beating returns, they need to invest in growth stocks. Often they will chase small or risky companies which (they hope) will generate large returns. Firstly, this can be hit and miss. Some of these companies will be successful, others will not. There is also the issue of deciding when to sell your shares to take profit, which you won't always get right. If it was possible to know when shares have hit their peak (or bottom) I would be a millionaire already!
You will also be exposing your portfolio to very high levels of volatility (the value will likely swing up and down much more than the market as a whole). This can be good when prices are going up, but when they inevitably decrease you can be left deeply in the red and unable to sell your shares.
Secondly, it simply is not true. The data I'm going to show you prove that investing in Dividend Aristocrats and Kings is a way of generating superior overall returns. This comes with additional benefits of lower volatility and rising dividends. Sound too good to be true? See for yourself. Below is the performance of the Dividend Aristocrats compared to the broader market over the last 30 years.
These figures are for Total Returns (takes into account dividends as well as price movements).
These figures are for Total Returns (takes into account dividends as well as price movements).
In 16 of the last 30 years, the Dividend Aristocrats have outperformed the S&P 500. That doesn't sound too impressive on paper, but if you look closely, you will notice that some of those years – 2013, 2015 to 17 – were virtually identical.
There were only 5 years in which the Dividend Aristocrats had an overall negative return, against 6 for the S&P 500. Every single year that the market as a whole was down, the Dividend Aristocrats and Kings were down less. Sometimes they were up – giving you greater stability and recession resistance.
The graph below might help you see the differences more clearly.
The Compound Annual Growth Rate for the Dividend Aristocrats has been around 12.3% compared to 10.5% for the market. You might have a hard time figuring out exactly what those numbers tell us in terms of performance. Have a look at the graph below and see for yourself. It shows what would have happened if you invested $10,000 in 1990 and left it to grow.
As you can see, the Dividend Aristocrats have massively outperformed the market over the past 30 years.
An extra 1.8% compound growth per year might not sound like a huge difference, but when you are compounding over many years, it quickly adds up. If you had invested $10,000 in the S&P 500 in 1990, you would have around $173,000 by the end of 2019. That looks like a great return, but not when you compare it to the Dividend Aristocrats and Kings. If you had invested $10,000 in them in 1990 it would have grown to a huge $304,000 by the end of 2019!
The performance during downturns and bear markets is also a huge consideration. 2008 is a perfect example. The market crashed by 38%, while the Dividend Aristocrats and Kings were down 'just' 22%. Even more importantly, they rebounded extremely strongly over the next couple of years, giving far superior performance compared to the S&P 500.
In the last 10 years, the returns of the Dividend Aristocrat and Kings compared to the S&P 500 have been virtually identical. However, the Aristocrats and Kings still provide you with greater stability, lower volatility and the reassurance of those rising annual dividends.
How can you invest in Dividend Aristocrats and Dividend Kings?
You can of course invest in individual stocks like I do. I have set out on my website some of the best dividend stocks to buy which are all Aristocrats and Kings. Make sure that you carry out your own research first before making any investment decisions.
You may prefer to instead invest in an ETF (exchange-traded fund). This will invest more broadly in the index and is an easy way to diversify without having to worry about making individual stock picks. Two of the best are SPDR S&P Dividend ETF (SDY) and ProShares S&P 500 Dividend Aristocrats (NOBL).
ConclusionI hope it is clear that Dividend Aristocrats and Dividend Kings are some of the very best investments that you can make in the stock market. Their long histories of raising the dividend every year points to companies which are strong, successful and prioritise shareholder returns. We can also see that they provide superior long-term performance as well as lower volatility during market downturns. What more could an investor ask for?!
It's important to remember that there is no such thing as a free lunch so the Dividend Aristocrat and Kings can never be 100% completely safe. Occasionally, companies do fall out of the list but this tends to only occur in extreme economic conditions or if a company has gone through a long period of steady decline. Make sure that you keep a close eye on your investments to ensure that they remain the right picks for you.
Although the market as a whole will sometimes beat the Dividend Aristocrats, is important to always take the long view with investing and have confidence that you will enjoy superior returns over the years.
Are you currently invested in Dividend Aristocrats? Do you think they are great investments or overrated? Are there any that you particularly like or avoid? As always, I'd love to hear your thoughts and questions in the comments below.
Stay safe, and happy investing.
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